Profit sharing plans allow employers to make discretionary contributions to an account for each employee based on a set formula. Profit sharing plans are used by large and small businesses alike, although they do require employers to file Form 5500 once a year.
Although employers are given the discretion to decide how much to contribute to a profit-sharing plan, they are required to use one common method for determining each employee’s contribution. Companies must also create a profit sharing plan document that contains specific information, including how certain key functions are carried out, such as how deposits are made.
Employers will also need to arrange a trust for the plan’s assets to ensure that they are used only for the benefit of the participants. The trust must have at least one trustee whose task it will be to handle contributions, investments, and distributions. It is also key to develop a record keeping system that can track contributions, expenses, and distributions, as well as earnings and losses. Keeping accurate records will help the plan’s administrator file the annual report with the federal government.
Finally, employers must provide eligible employees with information about the plan by creating and distributing a summary plan description (SPD). Generally, plans cover all employees, although some may be excluded, including those who:
Are under the age of 21 years old;
Have not worked for the employer for at least two years;
Are covered by a collective bargaining agreement that doesn’t allow for participation; or
Are nonresident aliens.
However, elderly workers cannot be barred from participating in a profit sharing plan solely because of their age.
Business owners have a variety of duties and responsibilities towards their employees, many of which have legal implications, making it especially important to obtain the advice of a financial manager. Our firm is dedicated to helping our clients address all of their accounting and bookkeeping needs, including tax preparation and full-service payroll, so if you have questions or concerns about any of these issues, please contact a member of the CORE financial management team to speak with a dedicated employee. Our Oklahoma City team can be reached by calling 405-288-1207, while those at our Tulsa office can be contacted at 918-209-3441. To contact our Lawton office, please call 580-353-2376 to set up a meeting with one of our consultants.